o 


The  Salient  Features  ''of'''''''  '"'"' 

n  Ideal  Accounting  System 


for  a 


Retail  Bookstore 


By  DfiWITT  CARL  EGGLESTON,   C.  P.  A. 

\\ 

Author  of  "Business  Costs,"  etc.    Member  of  Finn  of  Klein,  Hinds  &  Finke, 
Certified  Public  Accountants,  New  York. 


Based  upon  an  article 
read  by  the  author  at 
the  convention  of  the 
American  Booksellers' 
Association,  1921. 


3. 


THE    BAKER    &    TAYLOR    CO. 

Wholesale  Dealers  in    the   Wooks    of  oAll  Publishers 
55  Fifth  Ave.  NEW  YORK  At  Twelfth  St. 


Street 


To  the  Book  Buyer 

Remember  When  Selecting  Books   That 

WE  are  wholesale  dealers  in  the  books 
of  all  publishers,  and  can  supply 
all  books  in  common  use  in  this 
country,  and  in  print  at  the  present  time. 

Our  location  in  the  heart  of  the  publish- 
ing business,  our  enormous  stocks,  and  our 
close  relations  with  all  the  publishers  en- 
able us  to  render  prompt  service. 

We  number  among  our  customers  a 
great  many  dealers  who  find  it  decidedly 
convenient  to  be  able  to  secure  from  one 
house,  on  one  order  and  at  one  time,  all 
the  books  they  require. 

Write  for  further  information  and  ask 
for  our  various  catalogues. 

THE  BAKER  &  TAYLOR  CO. 

Wholesale  Dealers  in  the 
Books  of  all    Publishers 

354  Fourth  Ave.  NEW  YORK         At  Twenty-Sixth  St. 


T 


Preparing  a  Financial  Statement  Monthly 

HE  amount  of  business  done  by  a  retail  bookstore  is  generally  sufficient 
to  warrant  the  expenditure  of  the  time 'required  tix  kc£j>  :tVie  books  by 
system  as  explained  in  allJt^o^^oA-bo6klteepirig/'*rTiis 


the  double  entry  system  as  explained 
system  furnishes  a  means  of  analyzing  the  business  transactions  not  possessed  by 
any  other  system.  In  order  that  the  proprietor  may  know  just  where  he  stands 
financially  at  the  end  of  each  ?nonth  he  should  prepare  or  have  prepared  for 
him  a  balance  sheet.  This  statement  shows  the  assets,  liabilities  and  capital 
as  at  the  close  of  business  on  the  last  day  of  the  month.  When  the  books  are 
properly  kept  an  increase  or  decrease  in  the  proprietorship  or  capital  account 
as  compared  with  the  preceding  month  will  reflect  the  profitableness  or  un- 
profitableness on  the  undertaking  for  the  month.  If  the  results  shown  in- 
dicate that  the  present  policy  is  yielding  a  good  profit,  the  proprietor  has 
nothing  to  worry  about  on  the  one  hand,  but  if  the  results  obtained  from 
operations  are  not  what  they  should'  be,  the  proprietor  knows  that  he  should 
look  around  for  ways  and  means  with  which  to  make  a  better  showing. 

The  accounts  on  the  balance  sheet  should  be  arranged  in  a  systematic 
order.  On  the  left  hand  side  are  set  down  the  assets  (things  owned)  and 
on  the  right  side  are  entered  the  liabilities  (things  owed).  The  difference 
between  the  assets  and  liabilities,  if  the  former  exceeds  the  latter  as  is  the 
case  usually,  is  the  proprietorship  or  capital.  For  a  retail  bookseller  the 
best  plan  is  to  list  the  current  assets  first  and  then  the  other  assets  on  the 
left.  Then  on  the  right  come  the  current  liabilities  followed  by  the  other 
liabilities. 

In  a  typical  retail  book  business  the  current  .assets  appearing  on  the 
balance  sheet  would  be  Cash,  Accounts  Receivable  and  Merchandise  In- 
ventory. The  other  assets  would  include  such  items  as  Furniture  and  Fixtures 
and  prepaid  Insurance.  On  the  liability  side  the  current  items  would  be 
Accounts  Payable  and  Notes  Payable.  Liabilities  which  do  not  have  to  be 
paid  for  a  considerable  period  of  time  are  classed  as  other  liabilities  on  a 
balance  sheet.  When  a  banker  looks  at  a  balance  sheet  he  likes  to  see  the 
ratio  of  current  assets  to  current  liabilities  at  least  two  to  one. 

Book  Inventories 

In  order  to  prepare  a  balance  sheet  monthly  as  recommended,  it  is 
necessary  to  place  a  valuation  on  the  stock  of  merchandise.  It  is  of  course 
impractical  to  take  a  physical  inventory  and  figure  it  at  the  close  of  each  month, 
and  so  some  other  expedient  must  be  adopted  for  those  months  when  a  regular 
inventory  is  not  available.  The  system  which  many  of  you  use  and  which  is 
recommended  for  the  "Ideal  Accounting  System  for  Retail  Book  Stores"  is 
called  the  "Mark-up  on  Sales"  system.  The  system  consists  in  applying  a 
percentage  to  the  monthly  sales  in  order  to  ascertain  the  gross  profit  on  sales. 
The  sales  less  the  gross  profit  gives  the  cost  of  sales.  With  these  data  it  is 
an  easy  matter  to  place  a  valuation  on  the  merchandise  stock  for  statement 
purposes.  The  method  of  procedure  is  as  follows:  The  inventory  at  the 
beginning  of  the  period,  plus  purchases  for  period,  less  cost  of  sales,  gives 
inventory  at  the  end  of  period.  This  is  the  figure  to  use  for  the  merchandise 
inventory  on  the  balance  sheet. 

There  are  several  ways  of  obtaining  the  "mark-up"  percentage  on  sales 
to  use  in  figuring  the  gross  profit  each  month.  The  easiest  method  is  to  base 

775825 


the  parentage  on.  past  ."experience.  One  large  retail  book  store  has  used 
36  per  'cent,  aa  the  tnbarl^p  on  sales  for  the  past  three  years  and  states  that 
this*  rate,  does vnp.t,v(ary  one. per  cent,  from  actual  experience.  Another  book 
store  .uSesr  ^  ^eV  c$n{.J  vas\the/  mark-up. 

In  case  any  book  store  proprietor  does  not  want  to  make  use  of  an  average 
based  on  past  experience  he  can  arrive  at  the  actual  mark-up  percentage  on 
sales  as  follows:  When  invoices  for  purchases  are  received  from  publishers 
the  invoices  show  both  the  gross  and  the  net  price.  By  looking  at  an  invoice 
for  200  books  at  $5.00  less  40  per  cent.,  making  $600.00  net,  one  sees  that  the 
gross  profit  is  of  course  $400.00  or  40  per  cent.  By  providing  a  separate 
column  in  the  purchase  journal  for  recording  the  total  price  in  addition  to 
the  net  price,  the  average  percentage  of  mark-up  on  purchases  can  be  readily 
arrived  at  each  month.  It  is  then  necessary  to  combine  these  figures  with  the 
initial  inventory  at  cost  and  selling  price  and  obtain  an  average  mark-up 
percentage  on  stock.  This  percentage  can  then  be  used  on  the  sales  for  the 
month  in  figuring  the  amount  of  gross  profit  and  the  cost  merchandise  sold. 

A  separate  record  should  be  kept  of  "reductions"  made  in  the  selling 
price  or  allowance  made  when  valuing  merchandise  to  cover  shop  worn 
books.  Then  "reductions"  are  a  charge  to  the  expense  of  doing  business. 

Monthly  Profit  and  Loss  Statement 

By  applying  the  mark-up  percentage  on  sales,  as  explained,  the  gross 
profit  on  sales  is  arrived  at.  It  is  then  an  easy  matter  to  prepare  a  monthly 
profit  and  loss  statement.  From  the  gross  profit  on  sales  is  deducted  the 
expenses  for  the  month  in  order  to  arrive  at  the  net  result  of  operations. 

It  oftentimes  happens  that  a  sole  proprietor  will  not  charge  the  business 
for  his  salary  as  an  expense  of  operations.  So  far  as  the  final  result  is  con- 
cerned the  proprietor's  capital  will  be  the  same,  no  matter  whether  salary  is 
charged  to  expense  or  to  capital  account.  However,  from  a  "cost  of  doing 
business"  point  of  view  it  makes  a  lot  of  difference.  In  order  to  obtain  a 
complete  statement  of  the  expenses  the  proprietor  should  make  a  practice 
of  charging  his  salary  to  expense  and  crediting  his  drawing  account.  The 
amount  of  the  salary  charge  should  represent  the  market  value  of  the  pro- 
prietor's time.  This  method  of  procedure  need  not  confuse  one  when  pre- 
paring income  tax  statements.  The  proprietor's  income  is  equal  to  his  draw- 
ings plus  the  profit  earned  as  shown  by  the  books  after  drawings  have  been 
charged  up. 

It  should  be  the  practice  to  include  in  the  expenses  an  allowance  to  cover 
depreciation  on  all  equipment  used.  The  most  convenient  method  to  use 
for  figuring  depreciation  is  to  take  say  10  per  cent,  off  each  year  on  the  original 
cost  of  the  equipment  which  has  worn  out  or  become  obsolete.  This  should  be 
shown  as  a  deduction  from  the  original  cost. 

By  means  of  the  system  recommended  the  retail  bookseller  is  able  to 
know  his  profits  for  each  month.  He  should  then  divide  the  amount  of  his 
capital  investment  as  shown  on  the  balance  sheet  into  the  net  profit  for  the 
month  in  order  to  obtain  the  yield  on  the  investment.  The  profitableness 
of  the  undertaking  is  measured  by  the  rate  of  return  of  the  investment. 

Stock  Turnover 

Whether  a  store  has  one  or  several  departments  a  record  should  be  made 
of  the  rate  of  stock  turnover.  By  this  is  meant  the  number  of  times  the 

4 


stock  is  sold,  on  an  average,  in  a  year.  The  rate  is  obtained  by  dividing  the 
average  stock  of  merchandise  in  a  department  at  selling  price  into  the  sales. 
If  this  is  done  monthly  the^rate  when  obtained  is  stated  on  an  annual  basis. 
Thus  the  rate  of  turnover  in  Department  A  may  be  3  per  annum,  in  Depart- 
ment B,  4  and  so  on.  The  stock  turnover  rate  is  sort  of  index  of  efficiency. 
According  to  the  margin  of  profit  available  on  different  lines  there  is  a  mini- 
mum rate  of  turnover  below  which  it  is  unprofitable  to  do  business.  Some 
department  stores  claim  that  they  cannot  afford  to  carry  a  line  unless  a 
turnover  of  at  least  three  a  year  can  be  obtained.  The  average  annual  rate 
of  turnover  in  department  stores  is  reported  to  be  a  little  better  than  four. 

Analysis  of  Expenses 

The  "Ideal  Accounting  System  for  Retail  Book  Stores"  provides  for  a 
detailed  analysis  of  expense  under  appropriate  headings.  The  following 
expense  classifications  are  suggested  to  be  followed  in  making  up  statements 
of  the  cost  of  doing  business: 

Salary,  Proprietor  Express 

Salaries,  Regular  Insurance 

Salaries,   Extra   Help  Window  Dressing 

Overtime    (suppers)  Collection   Fees 
Rent                                                            f  Repairs 

Posta.ee,  Printing  and  Stationery  Electric  Light 

Advertising  Ice 

Delivery  Towel  Supply 

Telephone  Taxes 

Freight  Interest 

After  an  analysis  of  expenses  for  the  current  month  has  been  prepared 
the  expenses  for  prior  months,  since  the  beginning  of  the  year,  should  be 
added  in  order  to  obtain  a  statement  of  expenses  to  date.  In  order  to  be  of 
the  greatest  usefulness  this  statement  of  expenses  to  date  should  be  made 
comparative  in  form,  and  the  increases  and  decreases  of  the  current  year 
over  or  under  the  prior  year  for  the  corresponding  year  shown. 

Apportionment  of  Expense  to  Departments 

A  special  problem  is  met  with  when  a  store  sells  other  kinds  of 
merchandise  than  books.  The  problem  is  to  find  the  proper  basis  for  dis- 
tribution of  the  expense  of  doing  business  over  the  various  departments.  This 
is  of  course  an  important  matter  in  order  to  ascertain  the  net  profit  on  the 
operations  of  each  department.  The  first  step  in  the  apportionment  of 
expense  is  to  take  the  major  items  such  as  salaries,  rent  and  advertising  and 
divide  them  on  some  equitable  basis.  Salaries  should  be  charged  to  those 
departments  where  the  salespeople  are  assigned.  Rent  should  be  distributed 
to  selling  departments  in  proportion  to  the  space  occupied  by  each.  Adver- 
tising in  the  daily  papers  should  be  charged"  to  the  departments  which  have 
their  merchandise  advertised  in  proportion  to  the  space  used.  Those  expense 
items  which  cannot  be  charged  directly  to  departments  on  some  equitable 


basis  should  be  allocated  to  departments  in  the  proportion  which   the  sales 
of  each  department  bear  to  the   total  sales  of  the  store. 


Operation  of  General  Ledger 

It  is  necessary  for  the  retail  bookseller  to  keep  a  general  ledger  in  order 
to  be  able  to  make  up  the  statements  required  for  his  own  information  as 
well  as  governmental  returns.  This  book  should  be  in  bound  form  with 
standard  ledger  ruling.  Pages  should  be  headed  up  with  the  names  of  the 
various  accounts  required.  The  arrangement  of  the  accounts  should  follow 
the  order  of  the  accounts  on  the  financial  statements.  The  order  of  accounts 
is  as  follows:  Assets,  Liabilities,  Capital,  Profit  and  Loss.  In  order  to  open 
the  general  ledger  it  is  necessary  first  to  prepare  a  statement  showing  the 
assets  and  liabilities  at  a  certain  date.  From  this  statement  the  accounts 
in  the  general  ledger  can  be  opened.  Postings  are  made  to  the  general  ledger 
from  the  cash  book,  purchase  journal,  sales  book  and  journal.  Provision  is 
made  in  the  front  of  the  general  ledger  for  making  an  index  of  the  accounts. 
From  the  general  ledger  the  balance  sheet  and  profit  and  loss  statements  are 
made  up  at  the  close  of  each  month. 


Accounts  Receivable  Ledger 

When  there  are  a  good  many  charge  customers  it  is  a  good  plan  to 
remove  the  customer's  accounts  from  the  general  ledger  and  place  them  in 
a  separate  ledger.  The  accounts  receivable  ledger,  as  the  customers'  ledger 
is  called,  should  be  loose  leaf  in  form.  The  customers'  ledger  sheets  should 
be  arranged  behind  alphabetical  index  guides  for  convenience  in  reference. 
A  controlling  account  must  be  inserted  in  the  general  ledger.  At  the  close 
of  each  month  a  trial  balance  of  accounts  payable  ledger  should  agree  with 
the  balance  to  the  controlling  account  in  the  general  ledger. 


Cash  Book 

The  "Ideal  Accounting  System  for  Retail  Book  Stores"  should  provide 
for  using  a  columnar  form  of  cash  book.  The  operation  of  the  general 
accounts  receivable  and  accounts  payable  ledgers  in  accordance  with  the  plan 
above  outlined  requires  that  the  cash  book  be  operated  in  a  certain  prescribed 
fashion.  The  headings  for  the  received  side  of  the  cash  book  are  as  follows: 

Date 

Name 

Folio 

Accounts  Receivable  Ledger  Cr. 

Sales  Discount  Dr. 

Cash  Sales  (if  not  in  general  column)  Cr. 

Net  Cash  Cr. 

General  Ledger  Cr. 

Bank  Columns 

First   Bank 

Second  Bank 


The  headings  for  the  disbursed  side  of  the  cash  book  are  as  follows: 

Date 

Name 

Folio 

Accounts  Payable  Ledger  Dr. 

Discount  Cr. 

Net  Cash  Cr. 

General    Ledger  Dr. 

Bank  Columns 

First   Bank 

Second  Bank 

In  case  only  one  bank  is  used  the  net  cash  column  can  be  dispensed  with  and 
the   bank   column   used. 


The  rule  should  be  adhered  to  that  all  cash  receipts  should  be  entered 
in  the  cash  book  and  deposited  in  the  bank.  All  disbursements  should  be  by 
check.  When  a  remittance  is  received  from  a  charge  customer  the  amount 
of  the  original  charge  covered  by  the  remittance  is  entered  in  the  "Account 
Receivable  Ledger"  column,  any  discount  allowed  in  the  "Discount"  column, 
and  the  net  cash  in  the  net  cash  column,  the  amount  of  the  bank  deposit  is 
entered  in  the  bank  column.  The  general  ledger  column  provides  a  means 
for  entering  such  cash  receipts  as  are  to  be  credited  to  general  ledger  accounts. 

When  checks  are  drawn  in  favor  of  publishers  or  others  with  whom 
accounts  are  kept,  the  amount  of  the  invoice  settled  is  to  be  entered  in  the 
"Accounts  Payable  Ledger"  column,  any  discount  received  in  the  discount 
column  and  the  net  cash  in  the  net  cash  column.  Checks  to  be  charged  directly 
to  general  ledger  accounts  are  to  be  entered  in  the  general  ledger,  and  net  cash 
columns. 

A  separate  fund  should  be  established  for  the  petty  cash  and  minor  pay- 
ments made  from  it.  When  the  petty  cash  fund  requires  replenishing  a  check 
should  be  drawn  on  the  bank  for  the  amount  necessary.  The  accounts  to  be 
charged  are  shown  by  the  entries  in  a  petty  cash  book  kept  for  the  purpose. 

The  individual  items  in  the  "Accounts  Receivable  Ledger"  column  in 
the  cash  book  should  be  posted  to  the  credit  of  the  individual  customers' 
accounts.  The  items  in  the  "Accounts  Payable  Ledger"  column  in  the  cash 
book  should  be  footed  and  postings  made  to  the  general  ledger.  Each  month 
the  correctness  of  the  cash  balance  should  be  proved  by  making  a  reconciliation 
writh  the  bank  statement. 

Purchase  Journal 

All  invoices  from  publishers  or  other  vendors  with  whom  accounts  are 
kept  should  be  entered  in  a  purchase  journal.  In  this  book,  which  is  bound 
and  in  columnar  form,,  provision  can  be  made  for  a  distribution  of  merchandise 
according  to  the  various  departments  as  book,  stationery,  and  so  on.  The  total 
of  the  purchases  entered  in  the  purchase  journal  is  credited  to  the  accounts 
payable  controlling  account  in  the  general  ledger.  The  individual  items  are 
entered  in  the  subsidiary  accounts  payable  ledger  to  the  credit  of  the  individual 
accounts  kept  with  vendors. 


Sales  Book 

Sales  slips  for  charge  sales  should  be  entered  in  a  sales  book.  In  case! 
there  are  several  departments  in  a  store  as  book,  stationery,  and  so  on,  it  is  a 
good  plan  to  provide  for  entering  the  sales  in  columns  according  to  the  names  j 
of  the  departments.  Sales  slips  for  cash  sales  should  be  summarized  by  depart- 
ments at  the  end  of  each  day  and  an  entry  made  in  the  cash  book.  At  the] 
close  of  the  month  the  sales  book  should  be  footed  and  the  total  of  the  charge! 
sales  debited  to  the  accounts  receivable  controlling  account  in  the  general! 
ledger,  a  corresponding  credit  being  made  to  the  sales  account,  of  accounts. : 
The  individual  items  should  be  posted  to  the  debit  of  the  individual  customer's; 
accounts  in  the  accounts  receivable  ledger. 

SUMMARY 

The  "Ideal  Accounting  System  for  Retail  Book  Stores"  accomplishes  thej 
following  things : 

(1)  It  enables  the  proprietor  to  keep  in  close  touch  with  the  business] 
without  carrying  all  of  the  details  in  his  head. 

(2)  It  provides  all  of  the  information  required  for  making  up  "income] 
tax"  statements  without  any  laborious  digging. 

(3)  By  adopting  a  uniform  classification  of  accounts,  it  provides  for  the| 
exchange  of  information  between  members. 

(4)  It  furnishes  an  accurate  way  of  arriving  at  the  cost  of  doing  business.: 

(5)  A  monthly  balance  sheet  and  profit  and  loss  statement  is  provided] 
for.     i- 

(6)  Provision  is  made  for  showing  the  rate  of  stock  turnover  per  annum] 
as  an  index  of  efficiency. 

(7)  The  system  requires  a  detailed  analysis  of  expenses.     In  case  there! 
are  general  departments  the  expenses  are  to  be  distributed  in  such  a  way  as  to] 
enable  the  proprietor  to  ascertain  the  net  profit  in  each  department. 

(8)  It  requires  the'  double  entry  system  of  bookkeeping.     Coatrol  can] 
then  be  exercised  over  subsidiary  customers'  and  vendors'  ledgers. 

(9)  >  Columnar  cash  and  sales  books  are  required. 

While  it  will  benefit  the  individual  members  to  have  efficient  accounting] 
systems,  the  greatest  good  to  the  association  will  come  when  all  of  the  members] 
have  "the  ideal  system." 


REPRINTED  BY 

THE  BAKER  &  TAYLOR  CO. 


Wholesale  Dealers  in  the 
Books    of   all    Publishers 

354  Fourth  Ave.  NEW  YORK 

Courtesy  of  D.  Appleton  &  Company. 


at  Twenty-Sixth  St. 


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